What could be the features of the Pan-European Personal Pensions initiative (PEPP)?

Speakers: Berger Nathalie, K. Becker Heinz, Delbecque Bernard, Prache Guillaume, Sandrell Sultana, Setbon Philippe
Moderator: Bollon Pierre

On the 8th of March, PubAffairs Bruxelles hosted a debate on what could be the features of the Pan-European Personal Pensions (PEPPs) initiative with Ms Sultana Sandrell, Trade, Economic and Financial Affairs Unit, Maltese Presidency of the Council of the EU, Mr Philippe Setbon, Member of the AFG Strategic Committee, Ms Nathalie Berger, Head of Unit, Insurance and Pension, European Commission, Mr Heinz K. Becker, MEP (EPP/AU), Mr Bernard Delbecque, Senior Director, Economics & Research, EFAMA and Mr Guillaume Prache, Managing Director, Better Finance. The event was moderated by Mr Pierre Bollon, Chief executive of AFG.

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Ms Sultana started her introductory speech by saying that the generation of more savings for investments and the uptake of personal pensions (PPs) are key questions to address the pensions gap in Europe. In addition, she added, the Pan-European Personal Pension (PEPP) initiative aspires at further consolidating the EU’s Capital Market Union (CMU) initiative. As the CMU is one of the priorities for the Maltese Presidency, enhancing and finalising the remaining elements of the CMU agenda will be further pushed forward; furthermore, the PEPP initiative is an important aspect of the CMU agenda as it should at the same time provide long term financing to the European economy and give more substance to the CMU project. According to the speaker, the PEPP has also the potential to address key European challenges that lie ahead, such as the ones emerging from retirement funding and the evolutions of labour markets. Ms Sultana continued by remarking that the facts which led to the PEPP initiative are well known as demographic trends show that important changes in the society structure will occur, while public finances are expected to suffer from long term sustainability questioning. Although several member states have carried out substantial pensions reforms over the last decade and maintained a fair level of pensions incomes, she added, it is evident that the successful implementation of pension reforms is contingent upon a successful introduction of other pensions schemes, which supplement state pensions in order to guarantee an adequate income for pensioners over time. Within this context, Ms Sultana stated that it is also evident that policy makers will play a fundamental role in raising awareness, enhancing financial knowledge and guide citizens, while seeking sustainable solutions. However, it should come with no surprise that the path towards such solutions is not straightforward as fiscal, labour and social barriers add a layer of complexity to public institutions’ work to create a simple, transparent and accessible product. At the same time, key aspects to make this initiative a success will be taxation policies, as tax incentives will surely facilitate the uptake of these financial products, the PEPP scope, its governance, distribution regime, portability, investment options and PEPP schemes low cost. Finally, Ms Sultana reminded that the PEPP project should not undermine existing regimes. However, by keeping in mind that the PEPP initiative’s aim is above all to provide flexible and voluntary mechanisms which work for pensioners across Europe, a progressive outlook and a positive engagement from policy makers, the civil society and the industry should be able to provide for the best tools for EU citizens to prepare their retirement, while enhancing European investments.

Mr Setbon started his introductory speech by emphasising that current demographic trends will have an important impact on active population, aged population as well as on economic growth and savings, while highlighting the need to create innovative solutions against this setting. He added that the evolutions of the labour market and the increased mobility across Europe are highlighting further questions with regard to pensions. Within this context, in the speaker’s opinion, the PEPP initiative should be seen as one of the actions regarding the challenges ahead for the whole European society. Mr Setbon reminded that, at the end of 2016, the French Asset Management Association (AFG) put forward a white paper for the French policy makers fostering the national debate, now occurring at European level. By elaborating from this experience, Mr Setbon outlined that the main feature that led to the conceiving of a product related to pensions was the necessity to create an innovative financial product. Consequently, Mr Setbon stated that, by starting from the question of innovation, pan-European personal pensions should contain, in his opinion, the following features: firstly, they have to be financed by contributions and paid by product holders themselves; secondly, they should be an individual product which pays back the capital accumulated at once or gradually and allows for a valuable degree of flexibility; thirdly, they should be a complement to state and occupational pensions and should favour life-cycle investment as a default option; finally, although it will be up to member states to decide, Mr Setbon stated that it would be optimal for all the member states to apply the “most favourable regime” principle. In the speaker’s opinion, these features would allow for an innovative product to enhance competitiveness and be widely distributed not only by asset managers, but also by other polities such as banks and insurance institutions. Mr Setbon continued by stating that the enhancement of information and financial educations for citizens will be also a crucial aspect to both attract the whole of the active population as well as to allow the fostering of long-term investments across Europe. He highlighted the importance of providing EU citizens with an early estimation of the state pension, exhaustive information about the various possibilities offered, as well as a consolidated view of the investments results over time. Mr Setbon concluded by expressing his appreciation towards the Commission’s initiative on personal pensions and by emphasising that the spread of the current technological evolutions have already made the practical implementation of a pan-European personal pension system a reality.

Pierre Bollon introduced the speakers and lead the debate to its focal point of discussion, namely what challenges the PEPP initiative is faced with in order to be successful.

Ms Berger presented the challenges stemming from the PEPP initiative, which were confirmed during the Commission’s public consultations as both individuals, the industry and consumers associations have proactively participated to the Commission’s inquiries. The creation of a PEPP, especially for young people, will need to strike a balance between standardisation and flexibility.

Mr Prache started his intervention by stating that personal pensions are one of the priority issues for financial investors and users. Consequently, a swift action from EU policymakers is needed primarily because of population ageing and because the reshaping of the EU labour market will most likely make state pensions not able to provide a decent level of replacement income for retirement, and secondarily because occupational pensions notably cover around 15% of the total amount of workers in Europe. Mr Prache continued by reinforcing the statement of Ms Berger by affirming that PEPP products should be designed in the simplest way possible, especially within the aim of attracting low-income households and the youngest part of the population. Whereas, as long as flexibility was concerned, Mr Prache stated that there should be minimal restrictions on the type of investments possible as funds and insurance programmes are obviously the primary options, however, in his opinion, products such as shares, bonds and/or equities, although they are most likely to remain an investment niche, should not be excluded. Nevertheless, Mr Prache also remarked that a default investment option should be offered in view of protecting the weakest and/or least financially literate part of the population. The speaker continued by saying that, although he is not against including life cycle funds as a possible default option, these type of funds are objectively difficult to explain to the larger public and do not guarantee that pension savers will not lose part of their lifetime savings at retirement in real terms. This is why he advocates for a default option that guarantees at a minimum the real value of pension savings at the time of retirement. Mr Prache concluded by emphasising the importance of granting decent returns to citizens, as a decent replacement income will have to derive even more from accumulated returns than from the amounts saved over time.

Mr Delbecque started his intervention by acknowledging that most of the points raised in the previous interventions were agreeable, however, he continued by stating that it is also important to keep in mind the wider economic context by emphasising that one of the main ambitions of the project consists of encouraging some shift from bank account saving to capital markets instruments. In support of this argument, Mr Delbecque remarked that 41% of the financial wealth of the households in the Eurozone is held in bank accounts. Clearly, this asset allocation is not optimal, especially in an environment of low interest rates. Hence, an essential part of the PEPP initiative should be to promote saving and investment in capital markets to put savings to work and contribute to close Europe’s pension savings gap. From this perspective, the PEPP initiative is a fundamental aspect of the implementation of a successful Capital Markets Union. Mr Delbecque added that there is a consolidated economic research and literature that confirms that long-term investments can grant valuable and safe drivers of return. He also agreed with the other speakers in recognising taxation as an obstacle to the project, however he distinguished between two main issues: the consumers’ perspective and the providers’ perspective. With regard to the former, without tax incentives the decision to invest in Pan-European personal pension product will be undermined as without this important feature consumers will be inclined to opt for already existing national personal pension schemes. This being said, Member States should not be allowed to impose too many restrictions to the PEPP as a prior condition for granting a tax incentive. The PEPP needs indeed to be sufficiently standardised to allow exploitation of economies of scale. With regards the providers, cross-border business is notably complicated within the EU, however, asset managers are already used to deal with tax-related issues in the UCITS market. Hence, the lack of tax harmonisation should not hold back the European Commission from proposing the creation of a PEPP.

Mr Becker MEP started by expressing his optimism on the fact that the PEPP initiative will be a successful EU project. However, the MEP wished to offer a wider vision of the PEPP initiative that goes beyond the stances of the financial markets by emphasising that this EU initiative should primarily consider which are the target groups. Elaborating from these premises, Mr Becker stated that the inclusion of generational representatives as social partners for the whole of the EU policy-making process on pensions will be necessary by stressing the importance of inter-generational cooperation and solidarity, especially given the current European political and economic context. Indeed, in the speakers’ opinion, without policy change and inter-generational understanding, it will be nearly unavoidable that the current generation will not be able to grant similar standard of living for future generations. He also added that fairness and safeness should be the two main principles upon which PEPP products should be built, while acknowledging that there is also the necessity of striking a balance between the features of flexibility and standardisation. However, he concluded, the offering of a simple lifetime product should also be an unavoidable feature of the personal pension product.

The Q&A session also covered the following issues: personal pensions fund management, how distribution channels will be organised and managed, how consumers will be informed about investment risks, results of consumer testing exercices, how to attract the young generation, how to enhance financial information and education in Europe, cross-border financial operations in Europe, percentage of population covered by personal pension products, how to prevent abuses from providers, tax differences between member states, single market and taxation, providers’ competition and economies of scale.

Do you want to go further into the issues discussed in our debate? Check our list of selected sources which we have provided for you

Public consultation on a potential EU personal pension framework, European Commission

Keynote speech at the Public Hearing on Personal Pensions “Towards a pan-European pension product?”, Commissioner Thyssen

Eurogroup Statement on the structural reform agenda – thematic discussions on growth and jobs: benchmarking pension sustainability

AFG’s views on the Pan-European Personal Pension product (PEPP)

Consultation paper on EIOPA’s advice on the development of an EU Single Market for personal pension products (PPP), European Insurance and Occupational Pensions Authority

Better Finance, Publications

EFAMA, European Asset Fund Manager Association, Publications

Pan European Personal Pensions PEPP Initiative, Investment and Pensions Europe